Opportunity knocks twice for investors in Malaysia

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The Malaysian Ringgit has been under serious pressure over the past 12 months, tumbling 18.6 percent in 2015 and, while other Southeast Asian currencies performed negatively on the back of hikes from the U.S. Fed, the Ringgit was one of the worst performers.

Over the same period, Malaysia suffered from a sharp reduction in export revenues due to plummeting commodity prices, particularly oil prices which fell 61.8 percent from US$95.14/barrel in Jan 2015 to US$36.36/barrel December 2015.

While the Malaysian economy made a comeback over the first quarter of 2016 with the Ringgit rebounding to become one of the top performing currencies in the region, performance has slowed with the onset of challenging global economic conditions, particularly from China’s slowdown.

Real estate investors are poised to take advantage.

At a time of global uncertainty, the U.S. Dollar, to which the Ringgit is pegged, has always been a default safe haven currency and this, coupled with continued U.S. economic recovery prompted Janet Yellen to indicate a likely additional increase in interest rates over the coming months which will further affect the currencies of emerging countries.

The recent Brexit has increased the volatility of the ringgit. While the ringgit strengthened against the Pound, it is likely to be indirectly affected by global movements of investment funds into safe haven currencies and assets. It won’t have a direct significant impact on Malaysia as investments and trade flow are relatively small.

A hike in interest rates by the US Fed and the flight of surplus funds to safe haven currencies like the US dollar can cause volatility for both the ringgit and regional currencies. Asian currencies, are more robust with significant international reserve buffers compared to the days of the Asian Financial Crisis.

The long term fundamentals of the Malaysian economy remain intact with growth coming from the service, manufacturing and IT sectors. As a result of its well diversified economy, Malaysia grew by 5 percent in 2015 despite lower export revenues from commodities and, given that manufacturing constitutes 80 percent of the nation’s exports, a lower ringgit is likely to raise export competitiveness. This year, Malaysia will continue to grow at 4-4.5 percent – a commendable rate amid the current global weakness.

Commodity prices have bottomed and many investors chose to return to Malaysia in the early part of 2016. In fact, net foreign inflows, amounting to MYR 5.6 billion for the first quarter of the year, are a reversal of the outflows of portfolio investments that comprise mainly of movements of investments in bonds and equities across borders. Oil prices have rebounded to trade above US$50 per barrel, above its 30-year average of US$43/barrel while palm oil is also now above its 36-year average US$488.5/barrel.

Things can only get better

Given the recovery of commodity prices in 2016, the Ringgit is unlikely to be as severely tested in 2016 as it was in 2015 and we have seen the levels in which the ringgit bottomed in 2015. At these levels, investors should be buying. There is a second opportunity this year and those who missed the boat, can do so now. Ringgit is currently traded at about RM4.09/USD, significantly lower than the average five-year historical level of RM3.3/USD. For those real estate investors who take a long term view on Malaysia, they should take advantage of the weak Ringgit and reward will come to those who have a little patience and faith.